Governance of hedge funds falling short of mark, says USS

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UK - Hedge fund governance has failed to meet investors' expectations and must be improved, with board members often being "over-stretched and under-experienced", according to the Universities Superannuation Scheme (USS).

Daniel Summerfield, co-head of responsible investment at the £32.6bn (€37.1bn) fund, argued that the boards of hedge funds should be protecting investors' interests and called for the UK Stewardship Code to address governance of the asset class.

USS, one of the UK's largest pension funds, works with RPMI on its domestic equity voting policy, with the most recent revision now taking account of the Financial Reporting Council's Code, launched in mid-2010.

Summerfield spoke favourably of the collaboration, saying it allowed his pension fund's voice to become stronger as a result.

He also said USS was currently looking at the composition of boards at UK companies in which it owns a stake.

He said these companies, when challenged, often fail to consider all of the options available to them under the Code.

"Very often, we find companies comply rigidly with the Code, rather than explain why the appointee does not meet a certain principle," he said.

"Some companies seem to believe it's comply or else, rather than comply or explain.

"We'd prefer companies provide us with a coherent explanation as to why they believe the director should be reappointed beyond the nine years, when appropriate, and why this is beneficial for the company and its shareholders, rather than see this as a prescriptive rule."

Summerfield stressed that the fund was not in favour of quotas, but was simply pushing for more board diversity.

"Once boards broaden the gene pool from which they select directors, that should lead to a selection of potential candidates beyond the usual suspects," he said.

Board performance was also a problem within hedge funds, he added.

"Ultimately, hedge fund boards should be protecting our interests as investors in these funds," he said.

"There has been some improvement over the last couple of years, but hedge fund governance has some way to go before it meets the expectations of investors.

"The boards in many cases are still composed of individuals who are over-stretched and under-experienced."

Summerfield said there was room for governance in hedge funds to improve through the application of the Stewardship Code - which he would also like to see extended to corporate bonds and private equity investments.